Category Archives: Acquisition Strategy

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“There’s one thing I can guarantee: [integrating an acquisition is] going to suck. You and your team are going to have doubts, get tired, and become frustrated. That’s normal. Keep fighting, remembering, and reminding why you did the acquisition in the first place, and keep going.”

CFO Magazine recently featured an interview with Gordon Stetz, CFO of McCormick & Co., the spice and flavorings company. The article featured a picture of Stetz seated in a grocery store aisle, his head barely visible amid the sea of his company’s famous brands.

The stated message of the piece is about McCormick’s three-part strategy for acquisitions, a sensible approach about which more here: CFO Magazine. What caught The Merger Verger was the unstated message of the photograph, the visual evidence of the company’s branding strategy post-acquisition.

Now, McCormick dates its history back to 1889 and its red and blue “Mc” logo is recognizable in every supermarket, convenience store and bodega across the land. Success like that often leads companies to a kind of ego-driven branding myopia. “We are the great and powerful _______.” (Fill in the blank.) “We have the market power; everyone knows us; the value of our brand will add so much to these little guys.”

What bull.

The picture of Stetz tells a thousand words about McCormick: we buy brands because of their power not merely because of ours. If you purchased names like Zatarain’s or Lawry’s or Old Bay Seasoning and had to bring them into the fold of your huge and powerful uber brand, what would you do?

One of the toughest decisions a business person faces is the one to not do something bold. We are bred for boldness, steeped in a culture of advancement, rewarded for our actions. What idea is there that cannot benefit from our improvements?

In such a culture – magnified by the immense time pressures of integration – it takes both courage and objectivity to say, “No, I think we should just stay the course on this one.”

Is your integration process at risk of rushing headlong into failure? Keep in mind the important step that McCormick seems to have mastered: stop and smell the fines herbes.

Afterword: “stay the course” does not mean “do nothing.” As a powerful, branded acquirer, there can be any number of actions to leverage a newly acquired smaller brand while leaving that name intact. But those actions are all subordinate to the larger strategic objective of retaining the basic value that your company paid so much to obtain.

As a kid, did you ever play the Pete and Repeat game with your friends? The one about Pete falling overboard and Repeat being left? Then the whole thing plays round again (ad nauseum). Get it? Repeat is all that’s left? (Yeah, I know …)

Anyway, it turns out (observation courtesy of the smart folks at Bain & Company) that this is the most successful formula for sustaining and growing a business: focus on that which you do uniquely well; understand intimately why it is better; communicate that understanding throughout your organization; repeat.

Successful practitioners of roll-up acquisitions get that formula particularly well. Ditto for those whose acquisition sights are set on bolt-on deals. Have you read the most recent annual report from Berkshire Hathaway? There’s a strategic theme there. Sure, the portfolio is diverse but the acquisition M.O. of each of those companies is focused tightly on growing the sweet spot. Simple. Elegant. Effective.

Simplicity means that everyone in the company is on the same page – and no one forgets the sources of success.

Chris Zook and James Allen, two Bain partners, have written a book on “repeatability” in business, concluding that truly successful companies have crisp elements that differentiate them from their competition and they aim to maximize those differentiators to the exclusion of everything else that ambles down the strategic pike. The book, entitled “Repeatability: Build Enduring Businesses for a World of Constant Change,” is available on Amazon and spin-off articles are available on the Bain website (links below). The Merger Vergerrecommends the recent article in Harvard Business Review; it has many concepts that have direct application for acquisition strategy and integration planning.

There are several elements of the “repeatability” concept that bear on dealmaking and acquisition integration. First (as always) is the message of strategic intent; get that part right and many of your acquisition risks will be behind you. But … this is not just a process of thinking you are good at this or that; you must really understand your uniqueness in the marketplace. No fluff allowed.

The next key element is to articulate that message throughout your organization. In fact the Bain authors state in no uncertain terms that the greater the distance between a company’s strategic plan and the men and women who are called upon to carry it out, the greater the risk of dissipation, digression, disinterest and disaster. Keep your competitive differentiators clear and make sure that your team knows them and is invested in them.

The final key is the simplest to describe and potentially the hardest to do. Repeat. That is, repeat without straying from your strategy and your differentiators.

In closing, let me pause on the second of the three elements: articulating the message. The Bain authors imply that this step is too often overlooked, under the theory that everyone already knows what their employer does and what it stands for. Not true, they say. But if going the extra mile to articulate issues of strategy and competitive uniqueness is a value driver in normal settings, how much more so in the context of an acquisition?

A link between well-defined, shared core principles and frontline behavior was more highly correlated with business performance than any other factor we studied.

Take the time to truly understand, articulate and sell your company’s strengths to your newly acquired staff. They will be better performers and better apostles for it.

The Merger Verger is so confused. People seem to be slow to get things started and then in a hurry to get them over with. What’s up with that? I mean, if we were talking about eating Brussels sprouts, I could understand but if you’re in the merger business you must think it’s fun, right? Why not dig in? Why not see it through?

When I hear CXOs talk about acquisition integration, they mention two timing events, almost exclusively: closing day and Day 100. That’s it. Life begins at time zero and ends 100 days later. Hell, a stinkbug lasts longer than that.

Here’s the message:

Acquisition integration should start sooner than you think. It should start in the strategy stage. Particularly when strategic expansion – either in the vertical or horizontal direction – is the plan, attention to integration issues can clear the pathway, identify issues to address in advance and sharpen the analytical assumptions that underpin your bidding. If you are starting to think about an acquistion, start to think about integration.

Query to Readers: I would welcome stories from readers who have been involved in integration activities that by virtue of starting either early or late have given rise to potentially useful observations.

Acquisition integration should continue longer than you think.There is no finish line, no “The End,” no graduation, not even any fat lady singing in acquisition integration. Even the attainment of financial metrics does not necessarily mean “it’s over.”

Remember the adage “old habits die hard?” Old habits prevent the adoption of change. And acquisition integration is about the effective management of change towards a specific strategic intent.

Let me see if I can explain this timing thing in a way that even the visual learners will understand. If we view old habits as including practices, perceptions, expectations and the like, we might ask “to whom does the adage apply?” Let’s look:Hmmm. That’s odd. It seems to apply to everyone.

So, Sherlock, what does that suggest to integration professionals (and the executives that depend upon them) about the timing of the integration process?

Wait, I answered that question already … about a dozen lines ago: “Acquisition integration should continue longer than you think.”

This does not mean “forever” but nor does it mean in full accord with the best-laid plans. Not everything will go according to plan and most of the unforeseens will require more time than less. So be prepared for that in advance. In fact, any good integration plan will prescribe how to handle key delays.

CXOs: challenge your people but be open to change. It is better to be flexible and successful than rigid, punctual and errant.

Integration Directors: lay out clear plans and expectations, monitor them closely and prepare in advance for any project’s inevitable sloths. And keep your CXOs informed, good or bad.

Unfortunately, despite years of working on deals and a zillion conversations with people about them, I cannot offer a formula for when an integration process can be declared complete. It is just different with every deal, with every team, with every set of circumstances. So your focus should be on the objectives, not on the clock.

This is a vital topic and we’ll likely come back to it again often but let me close here with another …

Query to Readers: What are the metrics you follow (using the term “metrics” both numerically and subjectively) to assess/sense when an integration process is nearing completion? What lessons can you share from those times when the numerical metrics had been achieved but softer goals had not?

When it comes to corporate hubris and strategic inanity, there is no “beating a dead horse.” The poor animal simply will not die.

So The Merger Vergeroffers herewith the prospect of history repeating itself yet again, this time in the large-cap tech sector. I quote below a series of comments from a business blog discussing the acquisition by a tech giant of a very young company in a field only tangentially related to its core operations. See if it smells to you the same way it smells to me.

Analysts’ quotes:

“With today’s purchase of [Seller], [Buyer] is making its boldest bid yet to remain the most potent force in e-commerce.”

Query: does the definition of the word “bold” inherently imply “smart?” Some analysts wondered:

“It’s a marked departure for [Buyer], which to date has acquired only companies directly related to e-commerce.”

“It’s also a heckuva lot of money for a nascent business, no matter what the growth and the promise—and one in an entirely new area in which [Buyer] has no experience.”

One tech analyst went so far as to ask:

“… why [Buyer] couldn’t have gotten the same benefits much more cheaply and wondered if [Buyer] management might be leaning on their sizable market cap a little too much.”

“Together, we can pursue some very significant growth opportunities. We can create an unparalleled e-commerce engine.”

Each of those quotes – including the one from the CEO – could have been made (and several were made) about the Amazon/Kiva deal. But they all come from a very different transaction, one that was made in 2005 and then unwound (after a huge write-down) in 2008. The deal?

eBay’s purchase of Skype.

At the time of the unwind, one analyst remarked:

“eBay seems to have bought Skype and set it on auto-pilot (destination: nowhere) almost immediately.”

So all that Meg Whitman said about her acquisition, mirroring as it does what Jeff Bezos has said about Kiva Systems, could perhaps have been realized … if they had integrated the businesses more thoughtfully. God is in the details (another quote, architect Louis Sullivan, this time.)

I seem to be in quote mode, so I will offer one more, this one from the 18th century philosopher, Georg Wilhelm Friedrich Hegel, who said:

“We learn from history that we do not learn from history.”

To which Karl Marx appended:

“He forgot to add: the first time as tragedy, the second time as farce.”

The eBay acquisition of Skype was a tragedy, to use Marx’s term. It was one part strategic clunker and three parts integration disaster. The Merger Vergerwill watch with interest to see if the Amazon acquisition of Kiva – repeating history – turns into a Marxian farce.

In its press release, Fitch stated that its “previous concern about temporarily higher leverage [at CAT] following the Bucyrus acquisition has diminished.” Despite the deal causing a material increase in debt exposure, the company’s year-end Debt-to-EBITDA ratio remained near the pre-acquisition levels due to strong cashflow at CAT.

The rating review spoke favorably about the strategic benefits of the Bucyrus deal:

Following the Bucyrus acquisition, CAT has the broadest product line in mining capital goods. In addition, the acquisition added substantial aftermarket revenue, and CAT’s global distribution network should further improve customer service and product support for the legacy Bucyrus business. Also, CAT expects to realize revenue and synergy benefits, including putting CAT engines in more of Bucyrus’ machines.

I’ve worn a groove in my head from scratching it on last week’s Amazon-Kiva Systems deal. After reading all the press stating what a crafty move it is and after the huge uptick in Amazon’s (NASDAQ: AMZN) stock price, The Merger Vergerfeels like the odd man out on this one. [Original posting here]

I still disagree with all the fawning Wall Street analysts and tech-media commentators but I think I have homed in on an explanation. Let me offer up some facts and then some observations.

Facts:

Jeff Bezos built a spaceship to go to Zebulon or some place. (You can look it up.) The guy clearly has a “boys with toys” problem. Robots – even ones that look like giant orange throat lozenges skating around a warehouse floor – count as objects of desire. (Earth to Jeff.)

Kiva (founded in 2003) creates leading-edge material handling systems used by an impressive list of customers, including units of Amazon (but not Amazon itself). It’s privately held but recent revenues were reportedly north of $100 million, making the purchase price of $775 million a bracing 7X multiple of sales. (Yikes.)

Amazon has a long history of successful acquisitions, but all of them of the horizontal type. They have vertical partnerships but their experience in integrating a company whose business fundamentals are entirely different to theirs is basically nil. (Uh-oh.)

The company’s press release about the Kiva acquisition says a big nothing about the rationale behind it and offers only one minor tidbit about the plans for its integration: Kiva’s HQ will remain in Massachusetts. (Whoopee.)

Equity analysts have settled on the rationale that Kiva robots will bring significant efficiencies to Amazon’s order fulfillment process, which they should. (At an NPV of minus how much?)

Other analysts have pointed out that the move could be a competitive one, designed to prevent others from having the cost/efficiency advantage associated with the Kiva system, thus enabling Amazon to defend an important advantage. (Come on guys.)

One or two analysts have floated the idea that all those reasons apply but are small beer; the real reason is that Kiva unlocks a door to the next transformational step for Amazon. (Now, ladies and gentlemen, we may be getting somewhere.)

Here’s The Merger Verger’stake on all that:

The absence of any Amazon commentary on the deal’s strategic rationale could be a case of intentional competitive silence but it sure smells like the lack of any meaningful strategy to describe.

On the efficiency explanation, to suggest that the best way to capture the benefit of a key component of your operational infrastructure is to own it outright is just hubris. By that line of thinking, Amazon should buy a corrugated box manufacturer, UPS should buy a truck maker and Apple should buy, well, China. Metaphorically speaking, there must be some compelling reason to own when you can rent.

As a corollary, one does not pay 7X sales to obtain operational efficiencies; that’s just stupid. One pays that kind of multiple to launch a sales rocket.

Similarly, to buy a technology company merely to prevent competitors from gaining access to it is a flaccid strategy at best. Even acknowledging Kiva’s technological superiority, squirreling it away for Amazon’s exclusive internal use merely invites robotics wannabes to fill that void.

Again, one does not pay 7X sales for a company that one intends to prevent others from patronizing. For Amazon to gain an economic return, Kiva must be able to sell its products widely.

So what one DOES pay 7X sales for? One only pays that kind of money to unlock a transformed future.

Amazon is already a world-leading provider of retail fulfillment services, both internally and as a third-party provider for others. It has the expertise and infrastructure to keep growing this “pick and pack” business. But Kiva – owning it, not just renting it – could provide the last essential component of the next generation of competitive dominance in the space. By this thesis, the facilities and operational expertise that already exist at Amazon get combined with a future-pathway technology to create a logistics service that is domain leading and defensible. That makes sense to me.

Ironically, if my analysis is right (not just boys-with-toys, not just hubris, not merely operational efficiency, not competitive paranoia) Amazon has some gigantic integration challenges ahead of it. But I wouldn’t bet against them.

Information on Kiva:

Click here for the company’s website and here for a series of videos showing the system in action. Click herefor an amusing robotic interpretation of the Nutcracker Suite entitled “The Dance of the Bots.”

The recent acquisition by Meredith Corporation (NYSE: MDP) of Allrecipes.com strikes The Merger Verger as a strategically brilliant deal. It doubles their digital revenues with the top food website in the world and brings them enormous digital media and social networking expertise. The leverage potential is high, with opportunities to create value from Allrecipes to Meredith and vice versa.

But, having made four acquisitions in the last eight months, the company needs to settle down and make these deals work … now.

Meredith is buying two distinct forms of fleet-footed assets: customers and tech expertise. Blow the first few months of integration and the acquisition’s value proposition could deteriorate rapidly due to site visitors or employees taking flight.

Allrecipes.com is a very strong site that has generated a powerful brand. That suggests a degree of customer stickiness that would in turn suggest focusing first on retaining talent within the organization.

Recommendations for Meredith:

Turn the new-deal tap off (or way, way down). I know that Meredith Chairman & CEO Stephen Lacy sees a host of great media properties available in this post-recession environment but now is the time to “get right” those that he has already done, not get more to do.

Communication will be a key part of the integration puzzle. With such a strong strategic intent, they should be telling anyone who will listen about the benefits available to both organizations by thoughtfully executing on it (and telling it over and over). Touch the Allrecipes employees, particularly the key IT folks. Get down with them where they are.

Having purchased a company with a strong social media component, respect that society. However alluring the opportunity might be to start selling their other products to Allrecipes customers, do not rush around stuffing them with offers. Instead, contribute to their social experience, demonstrate the potential of cross fertilization with the other properties and invite them into the expanded world of Meredith. Pull, do not push.

Incorporate Allrecipes.com thought leaders (at multiple levels) into the larger game planning for Meredith’s digital future. It will send positive signals about the role of “new media” in a historically print-based company and increase the flow of expertise and ideas. Oh, and listen to the ideas from the Allrecipes guys; their input is not just for show.

I am scratching my head over Amazon’s (AMZN) announced acquisition of robotics (read: automated logistics) manufacturer, Kiva. For $775 million!!!

What strikes me initially is the comparison with two other recent news items: UPS’s (UPS) acquisition of TNT (TNTE.AS) and Apple’s (AAPL) decision to apply a fistful of its cash to dividends and stock repurchases. UPS is using its cash to expand horizontally, expanding its known capabilities into broader markets. Apple is admitting that it can’t possibly put all of its cash to good use and so is returning some of it to its owners, the shareholders.

Amazon is spending close to a billion dollars on a technology that it knows largely as a user (and a recent one at that). The Merger Vergeris skeptical.

That view is running counter to Wall Street’s. Amazon’s stock remains up about 5% from the announcement (against a generally flat market since then), resulting in an increase in market cap of nearly $4 billion. Holy shirt! That’s five times the purchase price.

From an integration perspective (strategic intent, vertical versus horizontal expansion, management know-how and probably due diligence as well) there is a lot to talk about here. More to come.

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THE MERGER VERGER is a forum for exploring, sharing and commenting on the world of acquisition integration.

Here at The Merger Verger we believe that acquisitions CAN be made to work, that they can create superior returns, superior workplaces and superior opportunities for the people involved. And we believe that bringing thought, imagination, and communication to the process is the right alchemy for achieving that end.

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